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Ten years from the financial crisis - banks, Brexit and populism....

Submitted by Elizabeth Consalvi on Tue, 30/10/2018 - 09:47

Our politics and our social discourse have fragmented into extremes as a result of the populism that was triggered by negative or flat real wage growth and a growing sense of inequality of opportunity.

The global financial crisis has left an indelible scar on the UK. The scar is not necessarily an economic one, it is a social and political one which has left the country devoid of a public debate about what we are as a nation and a society. Our politics and our social discourse have fragmented into extremes as a result of the populism that was triggered by negative or flat real wage growth and a growing sense of inequality of opportunity. The consequence of this populism was the rise of UKIP and Euroscepticism. The Brexit vote has left the country with no middle ground and with dissatisfaction on both sides of the Brexit debate as the government attempts to reconcile the extremes.

Expect this debate to become more accentuated. UK economic performance over the last ten years has been less than spectacular. The UK’s quarterly growth rates have been less than 0.9% since Q4 2013. Although employment is high, this is at the expense of productivity and productive investment, which have remained stubbornly low despite low interest rates and quantitative easing to ensure that banks could lend to businesses. SMEs in particular have stayed out of the borrowing market, while big corporates have increasingly preferred to fund their growth via the markets.Export values, although higher in the last year because of weak sterling, are only marginally higher than they were ten years ago ($557bn compared to $514bn, and most of this is accounted for by the strength of the dollar).

There is little doubt that banks are in a better place: they have the liquidity to withstand the pressures of another downturn and are disciplined by leverage ratios and regulatory supervision that is more powerful than it was before the crisis. Toxic shadow banking, which contributed to the financial crisis, is not regarded as a threat to financial stability and savings are protected through the Financial Services compensation scheme. Regulatory oversight now gives the Bank of England the tools to make sure that banks are not “too big to fail” although this has not been tested in fact. The government’s reviews to make banking more competitive have created a swathe of challenger banks and digital solutions, both from high street names and FinTechs and, partially as a result of all of this, Accenture surveys suggest that more people trust banks than at any time since 2012; but that still remains low at only 40% of the population.

As monetary policy slowly returns to normal, banking profitability has improved.However, low interest rates and loose monetary policy after the crisis did not create a return to borrowing for productive investment in businesses; and there is evidence from the BoE that much of the consumer borrowing is amongst individuals with high credit scores who are just reshuffling their debts around rather than paying them off. This isn’t a trust in banks issue - it is a systemic issue. While uncertainty remains about the global economic and political climate, borrowing remains captured in this non-productive space; and that is a challenge for banks and for UK productivity.

People may well trust their banks more, and this may be because they are using digital platforms to access the products that they need. But they are also borrowing more - and although the poorest communities have the lowest disposable income relative to expenditure, it is those with good credit scores who are borrowing the most: people are moving their debts around and not paying them off.

While people remain indebted, their mistrust of the system remains. This makes it harder for the government to bring together a nation that has been so severely divided by the political, economic and social contradictions since the financial crisis. The challenge now is for businesses, financial institutions and government alike to articulate clearly the benefits of trade while setting out a clear agenda for the amelioration of the negative side effects of globalisation such as inequality, mass migration and even conflict. Unless this is done, the UK will remain a confused and divided nation.